Follow these 5 fundamental rules when investing now and at any time of the year

I have never been much of a believer in New Year’s resolutions. If something is seen as worthwhile, then it probably should have been done already, not something you should now do just because the calendar has rolled over.

Much is the same for the stock market. Other than playing the January small-cap bounce, a new year does not mean you need to install a whole new investment game plan. After all, the economy does not look at the calendar much.

Still, January can be a good time to focus on the fundamentals. Of course, you should already be doing that, but if it really takes a new year to kick you in the butt and remind you, so be it. Here are five rules to follow.

Don’t be surprised

Apple Inc.’s announcement this week of slowing sales in China seems to have surprised everyone and its stock sharply fell as a result. But we’re not so sure why this news was a surprise at all.

Anyone watching the company over the past few months knows that Apple decided to stop forecasting the number of iPhone units it sold, and most saw this as a warning sign. In addition, anyone even remotely awake these days knows that China’s economic growth rate has been slowing recently. Nevertheless, Apple shares fell 10 per cent on the so-called news of its slowing growth.

Don’t sell just because a stock is up

Few are in a position to heed this rule right now, given the very weak markets of late, but markets won’t decline forever. When they rise and you find yourself in a nice profit position on a stock, don’t sell it just because you have a profit. Sell if you need cash, or if the stock is overweight in your portfolio, or if something negative has occurred at the company, but not because it has gone up. In almost all cases, there are good reasons why stocks rise.

You will also never get rich selling for a 20-per-cent profit. You need those 1,000-per-cent winners to really see your portfolio’s assets grow. Selling early only prevents that from happening.

Don’t sell just because a stock is down

This is an important rule, especially after a big market decline that has brought down the price of almost every stock. In a bad market, even good companies’ shares will decline. This does not make them bad investments. Indeed, these stocks will likely recover much faster than those of weaker companies during a market rebound.

Again, sell for whatever reasons you like, but not because it is down. This behaviour is likely what hurt a lot of stocks over the past few months. Fundamentals were good, but scared investors saw price declines and added to the selling pressure.

Don’t react

If an analyst puts out a very bullish report on a company, with a stock price target double that of current levels, would you frantically rush to buy? Probably not. I could name dozens and dozens of companies with giant brokerage target prices (doubles and more), but investors simply don’t seem interested in buying.

Why then do all investors seemingly rush to the exits as soon as a short report is issued on a company? Companies such as Dollarama Inc. and Maxar Technologies Ltd. have been hit hard by short reports since investors head for the doors on a negative report, but keep their wallets shut on a good report. This makes little sense.

Almost all reports, buy or sell, are inherently biased or have hidden conflicts. Sure, read as much as you can, but please don’t change your investment thesis on a company just because someone has issued a new report on that company.

Do your homework: If it is a good company, you are likely to do well over time. Reacting and panicking over a short report is exactly what short sellers want you to do. Don’t play right into their game.

Don’t assume correlation

Apple’s numbers this week brought down the market in general. However, the connect-the-dots patterns we noticed made little sense to us. For example, Grubhub Inc. fell in sympathy to Apple, but we can’t quite see the connection between slowing iPhone sales in China and a U.S.-based food delivery service.

Examples like this are everywhere: Investors are using Apple, or China, as an excuse to sell just about everything. This goes against the entire concept of diversification. Sure, a China slowdown can impact a lot of areas. But not everything is going to go down.

Keep your portfolio well diversified in many different sectors, with many different geographies represented. Apple’s issues are unlikely to negatively impact, say, the health-care space, or real estate in North America.

Peter Hodson, CFA, is founder and head of research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (http://www.5iresearch.ca).

Published at Fri, 04 Jan 2019 11:00:19 +0000